Europe On the Ropes

[grumpy]

In Europe, unlike in the US, it is only risk-weighted assets which
matter to the regulators, not the total leverage ratio. European banks
can therefore apply a lot more leverage than their US counterparties,
provided they load their balance sheets with higher rated assets, and
that is precisely what they have been doing.
That is fine as long as you buy what it says on the tin. But AAA is not
always AAA as we have learned over the past 18 months. Asset
securitisations such as CLOs proved very popular amongst European
banks, partly because they offered very attractive returns and partly
because Standard & Poors and Moodys were kind enough to rate many
of them AAA despite the questionable quality of the underlying assets.
…
Citibank has calculated that it would only take a cumulative increase in
bad debts of 3.8% in 2009-10 to take the core equity tier 1 ratio of the
European banking industry down to the bare minimum of 4.5%1. By
comparison, bad debts rose by a cumulative 7% in Japan in 1997-98.
…
But that is not the whole story. It is not even the most worrying part of
the story. For the true horror to emerge, we need to turn to Eastern
Europe for a minute or two. Nowhere has the credit boom been more
pronounced than in Eastern Europe. And nowhere is the pain felt more
now that credit has all but dried up
…
Meanwhile Western European banks, eager to milk the opportunities
in the East after the iron curtain came down, have acquired many of
the region’s banks (see chart 1). Now, with many Eastern European
countries in free fall, ownership could prove disastrous for an already
weakened banking industry in the West.
…
On the 11th February the Daily Telegraph’s Brussels correspondent
Bruno Waterfield wrote an article under the header: “European banks
may need £16.3 trillion bail out, EC document warns.” In the article,
the reporter revealed that he has seen a secret document produced by
the EU Commission which briefed the union’s finance ministers on the
true extent of the banking crisis. Less than 24 hours later, the article’s
header was changed to “European bank bail-out could push EU into
crisis” and two paragraphs had mysteriously disappeared. Here they
are:
“European Commission officials have estimated that “impaired assets”
may amount to 44pc of EU bank balance sheets. The Commission
estimates that so-called financial instruments in the ‘trading book’
total £12.3 trillion (13.7 trillion euros), equivalent to about 33pc of EU
bank balance sheets.
In addition, so-called ‘available for sale instruments’ worth £4trillion
(4.5 trillion euros), or 11pc of balance sheets, are also added by the
Commission to arrive at the headline figure of £16.3 trillion.”
…
If the EU
Commission’s estimate of £16.3 trillion of impaired assets is correct,
then the crisis is far worse than any of us could ever imagine. Not only
would we have to get used to the prospects of a systemic meltdown of
our banking system, but entire nations may go down as well.
…
The most obvious trick left in the book, therefore, is to inflate us out of
this mess. With the enormous amounts of public debt being created at
the moment, years of deflation a la Japan would be catastrophic. You
will never get a central banker to admit to it, but a healthy dose of
inflation is probably our best prospect of surviving this crisis.
Given this outlook, do you really want to be long euros?

arpllp.com/core_files/The%20 … 200309.pdf

Am fixing my debt for 10 years.

[the_edge]

They’ll inflate alright.

[Sidewinder]

They’ll try to inflate, yes.

Tens of trillions in bogus worthless derivatives, trillions more on stock and house prices, corporate earnings stuck in a lower gear for a very long time after the popping of the Blingundtat Bubble, a vast overhang of debt lowering consumer spending for a decade or two and truly stupendous amounts of pointless capital malinvestment.

D’ye really think a few billion in dodgy currency can overcome the tidal wave of destruction?

The Debtmonkey System is broken and it ain’t coming back in our lifetimes.

[labasta]

Tens of trillions in bogus worthless derivatives, trillions more on stock and house prices, corporate earnings stuck in a lower gear for a very long time after the popping of the Blingundtat Bubble, a vast overhang of debt lowering consumer spending for a decade or two and truly stupendous amounts of pointless capital malinvestment.

Very true.

D’ye really think a few billion in dodgy currency can overcome the tidal wave of destruction?

They could add a zero to our bank notes, but I don’t think that’s the issue.

I see this as a people v banks.

The evidence so far demonstrated by the politicians seems to show that government represents the banks and not the people. I’ve always thought democracy was a sham, but I wasn’t sure on who were the real masters. Now we know.

I mean taking advice from Sean Fitzpatrick to take money form the schools and pensioners shows you who is in charge of Ireland.

I believe the banks will still own the politicians who will screw the people until either a. the debt becomes manageable or (more likely) b. the people cannot pay for the banks any more as you can’t get blood from a stone. Society starts to break down and everybody rich or poor (who still have their capital in the country) loses. Only then will the government start to resemble a democracy and real solutions will be found.

Inflation is untenable for the banks, unless they can charge more interest than the inflation. If inflation is 20%, then those interest rates would be horrific for the banks to make money. Somebody is going to pay for this.

[grumpy]

If you look further than the next short while:

1. Most banks will end up being nationalised. That is the route we are on.
2. Taxpayers are on the hook therefore for vast amounts of debt.
3. Huge political pressure to “do something” to avoid Japans lost decade.
4. Consumers cant spend burdened by debt
5. Debt is forgiven through inflation
6. Savers get fucked

This scenario is probably the most hopeful for Ireland. Thing is, most people wont pay the insurance of fixing borrowing costs.

[yoganmahew]

On the subject of Japan, Mr. Krugman has changed his view of the ‘lost’ decade:
ftalphaville.ft.com/blog/2009/03 … ad-really/

Japan ‘doesn’t look that bad’, really…
Posted by Gwen Robinson on Mar 10 10:30.

Lo, Japan no longer “looks that bad”, according to Paul Krugman, in an entry on his blog headlined “Japan reconsidered:

For a decade or so Japan’s lost decade has been the great bugaboo of modern macroeconomics. Economists constantly warned that you mustn’t do X or you must do Y, because otherwise we’ll turn into Japan. And policymakers congratulated themselves in advance for not being like their Japanese counterparts, who dithered and drifted, refusing to make hard decisions.

Well, I’m sure I’m not the only person to notice this: Japan doesn’t look so bad these days.

I still don’t see how inflation is going to help anyone. Unless there is matching wage inflation, the problem remains - household debt-to-income ratios are too high.

[Canny_Scot]

@grumpy

If you look further than the next short while:

1. Most banks will end up being nationalised. That is the route we are on.
2. Taxpayers are on the hook therefore for vast amounts of debt.
3. Huge political pressure to “do something” to avoid Japans lost decade.
4. Consumers cant spend burdened by debt
5. Debt is forgiven through inflation
6. Savers get fucked

This scenario is probably the most hopeful for Ireland. Thing is, most people wont pay the insurance of fixing borrowing costs.

I keep reading opinions like this on here, that inflation is about to destroy savings.

This may not be the case at the moment, as CBs are struggling to stave off deflation according to some. The big question is when does inflation kick in, and in what asset class?

As this is (some might argue nominally at this stage) a website about the Irish property collapse, are those predicting spiking inflation also predicating an increase in the price of houses as a result??

[grumpy]

@yoganmahew

I still don’t see how inflation is going to help anyone. Unless there is matching wage inflation, the problem remains - household debt-to-income ratios are too high.

But isnt that the whole point that increases in wages erode the burden of debt. Of course, our wages are too high in real terms so those increases may lag inflation.

I posted the artice as I think medium term inflation is a real possibility. Unlike a lot of people here I have debt and have given a lot of thought to Taleb’s attitude to risk and variable interest rates with income uncertainty are one of my two huge financial risk. It is easy to take the recent decreases to ease off on my current thrift, but have decided to keep the payments the same by fixing the debt.

[PROFESSORI]

The most obvious trick left in the book, therefore, is to inflate us out of
this mess. With the enormous amounts of public debt being created at
the moment, years of deflation a la Japan would be catastrophic. You
will never get a central banker to admit to it, but a healthy dose of
inflation is probably our best prospect of surviving this crisis.
Given this outlook, do you really want to be long euros?

Couldn’t have put it better myself.

[yoganmahew]

@grumpy

@yoganmahew

I still don’t see how inflation is going to help anyone. Unless there is matching wage inflation, the problem remains - household debt-to-income ratios are too high.

But isnt that the whole point that increases in wages erode the burden of debt. Of course, our wages are too high in real terms so those increases may lag inflation.

I posted the artice as I think medium term inflation is a real possibility. Unlike a lot of people here I have debt and have given a lot of thought to Taleb’s attitude to risk and variable interest rates with income uncertainty are one of my two huge financial risk. It is easy to take the recent decreases to ease off on my current thrift, but have decided to keep the payments the same by fixing the debt.

I agree, that’s what increases in wages would do as part of a general inflation; I just don’t see how, with global wage arbitrage depressing wages, that is to be achieved short of:

1. Protectionism
2. Capital controls/import controls/job export controls (more protectionism)
3. Tariffs (eh, protectionism)

I also don’t see how it is possible to have higher inflation without higher interest rates, as you point out above. The risk to debtors therefore doesn’t decrease with high inflation, in fact it increases in the short-term as higher interest rates will demand a payment premium before incomes ‘catch-up’, as you also point out.

Further, I still think it unlikely that the Bundesbank-dominated ECB will allow for high inflation to erode savings. It is a constitutional requirement in Germany that money be sound. The Bundesbank managed to get through the 1970s without severe inflation, despite what the rest of the world was doing. Could it be different this time?

[Duplex]

Professor of economics at the University of Massachusetts at Amherst, Wolff is featured in a new film produced by the Media Education Foundation, “Capitalism Hits the Fan.”

He said today: "We need to see this crisis historically to get a sense of how serious this is. In every decade from 1820 to 1970, workers in the United States enjoyed a rising level of wages. Even during the Great Depression this was true. But since the 1970s, that history of the U.S. stopped. Real wages stopped rising in the 1970s and they have never resumed.

"To understand the American economy in the last 30 years amounts to this: Employers no longer raised the wages of their workers. Instead, they lent them the money. ‘Instead of raising the wages of my workers, I lend them the money, which they have to pay me back – with interest! Isn’t that better than paying them more wages?’ In this way, the rich got much richer while the majority fell ever further behind, building toward today’s economic crash.

“What the Obama administration as well as most of the Democrats and Republicans in Congress fear to admit is that this isn’t just a crisis of Wall Street. We’ve run out of ways to keep this going, the wages are not going up and the credit is now tapped out. It’s not a ‘financial crisis’ – finance is just the symptom – it’s a crisis of the fundamental structure of the economy.”

accuracy.org/newsrelease.php?articleId=1944

Link to short video

mediaed.org/cgi-bin/commerce.cgi?preadd=action&key=139

[grumpy]

Here is a depressing read from the IMF about gov finances:

imf.org/external/np/pp/eng/2009/030609.pdf

From it:

Add the banks bad debts to government debt and inflation will seem attractive.

[grumpy]

@Duplex

Professor of economics at the University of Massachusetts at Amherst, Wolff is featured in a new film produced by the Media Education Foundation, “Capitalism Hits the Fan.”

He said today: "We need to see this crisis historically to get a sense of how serious this is. In every decade from 1820 to 1970, workers in the United States enjoyed a rising level of wages. Even during the Great Depression this was true. But since the 1970s, that history of the U.S. stopped. Real wages stopped rising in the 1970s and they have never resumed.

That reminded me of a super lecture posted by GB a while back. Skip the intro, about 5 mins.

The Coming Collapse of the Middle Class with Elizabeth Warren

[yoganmahew]

@Duplex

Professor of economics at the University of Massachusetts at Amherst, Wolff is featured in a new film produced by the Media Education Foundation, “Capitalism Hits the Fan.”

He said today: "We need to see this crisis historically to get a sense of how serious this is. In every decade from 1820 to 1970, workers in the United States enjoyed a rising level of wages. Even during the Great Depression this was true. But since the 1970s, that history of the U.S. stopped. Real wages stopped rising in the 1970s and they have never resumed.

There is a danger in counting in round numbers. Economic cycles don’t seem to recognise them…

For instance, while workers 1920-1930 earned more by the end of the decade than at the beginning, between about 1925 and 1935 wages fell (IIRC the dates), with a significant amount of that in the late 1920s. This was identified at the time as one of the proximate causes of the depression - the increase in debt relative to wages and the reduction in spending power.

But what seems clear is that spending power has reduced relative to credit outstanding, that this has been going on for a long time, and that deflation in the price of consumer goods, high employment rates and low interest rates have masked this.

[Sidewinder]

@Duplex

Professor of economics at the University of Massachusetts at Amherst, Wolff is featured in a new film produced by the Media Education Foundation, “Capitalism Hits the Fan.”

He said today: "We need to see this crisis historically to get a sense of how serious this is. In every decade from 1820 to 1970, workers in the United States enjoyed a rising level of wages. Even during the Great Depression this was true. But since the 1970s, that history of the U.S. stopped. Real wages stopped rising in the 1970s and they have never resumed.

I’ve been rambling on about this for years, the 1970s Counter-Revolution and the concerted effort ever since to convince the masses to abandon all the gains in wages, welfare and conditions made by the common man since the end of WWI. This is actually what Reagan and Thatcher (and the PDs) were really all about.

Tis right back to the 18th century the bankers and their pet politicians want to take all of us.

[Duplex]

So does this mean that an attempt to induce general price inflation would be unsuccessful, as labour has lost much of it’s compensating pricing power?

[Sidewinder]

@Duplex

So does this mean that an attempt to induce general price inflation would be unsuccessful, as labour has lost much of it’s compensating pricing power?

Real wages have been stagnant at best pretty much everywhere in the industrialised world for 20 years, the populace in general is maxed out on debt, the demographics are poor, the amount of “wealth” destruction going on dwarfs any printing the central banks can possibly do, and there is a vast amount of misallocated slack capital that was poured into houses, factories and shopping centres during the bling bubble.

For all those reasons I’ve been firmly in the “deflation everywhere” camp for months. I just can’t see how any attempt to engineer an inflation can possibly succeed.

[Duplex]

@Sidewinder

@Duplex

So does this mean that an attempt to induce general price inflation would be unsuccessful, as labour has lost much of it’s compensating pricing power?

Real wages have been stagnant at best pretty much everywhere in the industrialised world for 20 years, the populace in general is maxed out on debt, the demographics are poor, the amount of “wealth” destruction going on dwarfs any printing the central banks can possibly do, and there is a vast amount of misallocated slack capital that was poured into houses, factories and shopping centres during the bling bubble.

For all those reasons I’ve been firmly in the “deflation everywhere” camp for months. I just can’t see how any attempt to engineer an inflation can possibly succeed.

They could do a spot of command economy price and incomes policy.

[yoganmahew]

@Duplex

They could do a spot of command economy price and incomes policy.

But without protectionism, european and US labour will be priced out by cheaper labour elsewhere. You can see why it is such a popular cheap trick in a depression. The only way to control price would be to set a floor using import tariffs - is there anything that is made in Europe that isn’t made elsewhere?

[onlyone]

• is there anything that is made in Europe that isn’t made elsewhere?

Irish Wiskhey
French Cheese
Alfa Romeos
Italian Wine
Marketing of Luxery Goods

and lots of other stuff. Whats made only in Europe does not matter, its how much you can add in value